This regular feature focuses on developments that affect the bank examination function. We welcome ideas for future columns. Readers are encouraged to e-mail suggestions to supervisoryjournal@fdic.gov.

The Home Ownership and Equity
Protection Act of 1994 (HOEPA) targets
certain deceptive and unfair mortgage
lending practices by amending the Truth
in Lending Act (TILA) to require special
disclosures and impose prohibitions
for mortgage loans with high rates or
fees. However, the protections afforded
consumers under the 1994 TILA amendments
extended only to homeowners
who already owned their homes (i.e.,
home equity mortgages). Furthermore,
in promulgating implementing regulations
under Regulation Z, the Board of
Governors of the Federal Reserve System
(Federal Reserve), exercising its discretion
under TILA and HOEPA, further
restricted the reach of these protections
to home equity mortgages that met or
exceeded specific cost parameters (i.e.,
“high-cost” mortgages).1

In 2008 and 2009, pursuant to its
continuing authority under TILA and
HOEPA, the Federal Reserve further
amended Regulation Z.2 The 2008/2009
Regulation Z amendments extend
specific protections to consumers of a
newly created category of mortgage loans
called “higher-priced” home mortgages.
In addition, the 2008/2009 Regulation
Z amendments enhance existing protections
for consumers of high-cost mortgages to match more closely many of
the newly created protections for higher-priced
mortgage loans.3 The amendments
also add protections for consumer mortgages
other than higher-priced or high-cost
mortgages and expand and enhance
the early disclosure requirements of
Regulation Z.

New and Enhanced
Protections for Consumers of
Higher-Priced and High-Cost
Mortgage Loans

Although TILA and Regulation Z
attempt to protect consumers primarily
through requirements to provide
sufficient information (i.e., disclosures)
with which to make an informed credit
decision, Congress, through its broad
grant of authority to the Federal Reserve
to explicitly prohibit unfair or deceptive
mortgage lending practices, recognized
that disclosures alone cannot always
protect consumers from the significant
harm (e.g., high costs and unsustainable
loans) caused by certain mortgage terms
and lending practices.

Many have attributed the rising
number of home mortgage delinquencies,
defaults, and foreclosures, as well
as declining home values—and even,
to some degree, the general decline of
entire communities—to the relatively
recent practice of “flipping” (i.e.,
repeated refinancing by the same lender)
unsustainable home mortgage loans.
With each flip, a homeowner’s equity is tapped to cover the cost of the refinancing.
This constant churning of mortgages
and repeated collection of fees has
become known as “fee harvesting.” This
pattern of home mortgage lending typically
disregards a consumer’s repayment
ability, which, in turn, leads to repeated
refinancings and the imposition of often
exorbitant prepayment penalties and
other fees. As a result, a home’s equity
is often stripped and larger mortgage
balances are created, which ultimately
can result in foreclosure and loss of a
consumer’s home.

More recently, many of the harmful
practices typically associated with home
equity lending have been seen in the
financing of home purchases as well,
resulting in unsustainable home ownership
and other harm to consumers.4 To
address this unwelcome trend in financing
of home purchases, Regulation Z
has been amended. TILA’s prohibition
against making certain home equity
mortgage loans based on the underlying
collateral without regard to the consumer’s
repayment ability has been extended
under Regulation Z to certain purchase-money
mortgages as well.

Overall, the amended provisions
(which, with limited exception, become
effective on October 1, 2009) do the
following:

Establish consumer protections
specific to a new category of mortgage
loans called higher-priced
mortgage
loans,

Establish new consumer protections
relating to prohibited behavior
toward appraisers and prohibited
practices by servicers, and

Expand and enhance the regulation’s
early disclosure requirements
and impose new prohibitions against
deceptive advertising

This article examines and discusses
each of these four significant amendments
to Regulation Z and offers suggestions
for FDIC examiners (and other
compliance professionals) responsible for
ensuring compliance with these critical
regulatory changes.

New Protections for
Consumers of Higher-Priced
Mortgage Loans

Although TILA and Regulation Z
seek to protect consumers primarily
through disclosure, by enacting HOEPA
Congress sought to protect consumers
by specifically prohibiting certain
unfair and harmful mortgage lending
practices. And during 2008 and 2009,
the Federal Reserve amended Regulation
Z by establishing specific consumer
protections for a new category of mortgage
loans, i.e., higher-priced mortgage
loans.5 A higher-priced mortgage loan
is any mortgage (purchase-money or non-purchase-money) secured by a
consumer’s principal dwelling, extended
for a consumer (i.e., personal, family,
or household) purpose, with an annual
percentage rate (APR) exceeding the
“average prime offer rate” on prime
loans (published by the Federal Reserve)
by at least 1.50 percentage points for
first-lien loans and 3.50 percentage
points for subordinate-lien loans.6 Mortgage
lenders originating higher-priced
mortgage loans are prohibited from
engaging in specific practices deemed
unfair under Regulation Z, including the
following.7

Relying on the collateral
securitizing the loan without
regard to the consumer‚s ability
to repay the loan

A mortgage lender is prohibited from
originating a higher-priced mortgage
loan based on the value of the collateral securing that loan without regard to
the consumer’s ability to repay the loan
as of consummation.8 In determining
repayment ability, a mortgage lender
may consider a consumer’s current and
reasonably expected income,9 employment,
assets other than the collateral,
current obligations, and mortgage-related
obligations. Mortgage-related obligations
include obligations such as property
taxes (relating to the property securing
the mortgage), premiums for mortgage-related
insurance required by the mortgage
lender, homeowners association
dues, and condominium fees, as well
as secondary mortgages taken on the
same property before or at consummation.
For example, when underwriting a
higher-priced mortgage as a first lien to
purchase a home, the mortgage lender
must consider any piggy-back second-lien
transaction used to finance part of the
down payment on the house.

Relying on the consumer‚s
income or assets without
verifying such amounts through
reasonably reliable third-party
documents

When evaluating a consumer’s ability
to repay a higher-priced mortgage, a
mortgage lender is prohibited from relying
on the consumer’s income, assets,
or obligations without verifying such
amounts through reasonably reliable
third-party documentation.10 For example,
if a consumer earns a salary and
states that he or she is paid an annual
bonus, but the creditor relies only on the
applicant’s salary to evaluate repayment
ability, the creditor need verify only the
salary. However, if a future annual bonus
is relied on to qualify the consumer at
consummation, the expectation of the
future bonus must be reasonable and
verified with third-party documentation
demonstrating past bonuses in amounts
bearing a reasonable relationship to the amount of the expected bonus.11 Although reliance on documentation
specific to a consumer’s individual
income obtained from an employer’s
third-party database is permissible,
information about average incomes for
the consumer’s occupation in the local
geographic location or information about
average incomes paid by the consumer’s
employer does not satisfy the verification-of-
income requirement. With respect
to obligations, a mortgage lender may
rely on the information contained in
a credit report to verify a consumer’s
obligations.12

A mortgage lender is presumed to have
complied with Regulation Z’s prohibition
against granting higher-priced mortgage
loans without regard to a consumer’s
ability to repay and without verifying
income, assets, and obligations if the
lender13 (1) verifies the consumer’s
repayment ability per the requirements
described above,14 (2) determines the
consumer’s repayment ability using the largest payment of principal and interest
scheduled in the first seven years following
consummation (and considering
current and mortgage-related obligations
in the manner described above),15 and
(3) assesses the consumer’s repayment
ability taking into account the ratio of
total debt obligations to income or the
income the consumer will have after
paying all debt obligations16

Compliance Practitioner Note:

Where a higher-priced mortgage loan has
a fixed monthly payment for the first seven
years concluding with a balloon payment,
a mortgage lender may, for purposes of the
presumption, determine the consumer’s
repayment ability by considering the amount
of the consumer’s fixed monthly payment.
But where a balloon payment comes due
before the end of seven years, the balloon
payment must be considered in determining
repayment ability, in effect, prohibiting
higher-priced mortgage loans with balloon
payments due in less than seven years in
almost all cases.

This seemingly innocuous provision of the
Regulation Z amendments has the potential
to significantly impact real estate lending
activity among banks, predominately smaller
banks, which commonly originate and portfolio
three- or five-year balloon mortgages.
These mortgage loans are originated in this
manner because they often do not qualify for
sale into the secondary mortgage market.
Banks offering these short-term, in-house
mortgage loans tend to charge more in interest, but often less in fees, than loans
conforming to and sold into the secondary
mortgage market.

Typically, the interest rates charged
for these mortgage loans qualify them as
higher-priced mortgages and, therefore,
subject them to the repayment ability
standard of the Regulation Z amendments.
Consumers seeking these three- or five-year
balloon mortgage loans likely will not satisfy
the repayment ability standard owing to the
balloon payment. Banks continuing to offer
these mortgage loans on or after October
1, 2009, likely will have to reduce the APR
charged to prevent these loans from being
higher-priced mortgages.

Many banks adopting this approach might
consider compensating for the APR reduction
by increasing loan fees. However, banks
contemplating any such rate or fee restructuring
must take into account whether the
fees are finance charges under Regulation
Z and therefore must be included in the APR
calculation.

Further, where the purpose of the mortgage
is other than purchase or construction
of the borrower’s home, banks choosing to
restructure their pricing of these short-term
balloon loans by adding loan fees must
remain aware of and in compliance with
Regulation Z’s provisions relating to high-cost
mortgages. As discussed elsewhere
in this article, the Regulation Z provisions
governing high-cost mortgages, unlike
higher-priced mortgages, have thresholds
both for fees and APR, and the fees included
here are broader than just those that are
considered finance charges under other
Regulation Z provisions.

Of course, where the borrower has the
right under the mortgage contract to renew
the loan beyond seven years, there is no
balloon payment that needs to be considered
in determining repayment ability. While
this right may be conditional, it is important
to note that satisfying the conditions must be
within the borrower’s control.17

With respect to the requirement to verify or document income or assets, the Federal Reserve has created a safe harbor for a mortgage lender that does not verify or document income or assets used to determine repayment ability. Under the safe harbor, a mortgage lender does not violate Regulation Z if it demonstrates that the stated income or assets it relied upon were not materially greater than the amounts it could have verified. For example, if a mortgage lender determines a consumer‚s repayment ability by relying on the consumer‚s stated annual income of $100,000, but fails to obtain reliable third-party documentation verifying that amount before consummating a higher-priced mortgage loan, the mortgage lender will not have violated Regulation Z if it later obtains reliable evidence that would satisfy Regulation Z‚s verification requirement. Such evidence might be a W-2 or tax return information showing that the mortgage lender could have documented, at the time the higher-priced mortgage loan was consummated, that the consumer had an annual income not materially less than $100,000. However, FDIC-supervised institutions engaging in mortgage loan underwriting practices that base extensions of mortgage credit on consumers‚ stated income (without verification through reliable third-party documentation) will be carefully evaluated on a case-by-case basis to determine whether such practices raise (1) safety and soundness concerns, particularly if seen on a portfolio-wide basis; or (2) consumer protection concerns under section 5 of the Federal Trade Commission (FTC) Act (Unfair or Deceptive Acts or Practices) or other consumer protection laws or FDIC guidance.18

Imposing a prepayment penalty
after two years or imposing a
prepayment penalty at any time
under certain circumstances19

A mortgage lender is prohibited from
imposing a prepayment penalty on a
higher-priced mortgage loan after the
first two years. In addition, a mortgage
lender is prohibited from imposing a
prepayment penalty at any time during
the term of a higher-priced mortgage
loan if

– The consumer’s mortgage payment
(i.e., payment of principal or interest or
both) can change during the first four
years of the loan term. For example,
the imposition of a prepayment penalty
on a higher-priced adjustable-rate
mortgage that resets every five years
would be permissible. However, if the
loan contract in this example permits
negative amortization and the right of
the mortgage lender to accelerate the
payment reset date, for instance, when
the loan balance reaches a contractually
set threshold caused by the negative
amortization within the first four years of the loan term, the imposition of a
prepayment penalty would be prohibited.21

– The source of the prepayment funds
is a refinancing by the same mortgage
lender or an affiliate of the mortgage
lender. This prohibition is specifically
designed to prevent equity stripping
through repeated loan flipping by the
same mortgage lender, a historically
common practice among subprime
mortgage lenders.22

Failing to escrow for property
taxes and mortgage-related
insurance when the mortgage
loan is secured by a first lien

A mortgage lender is prohibited from
originating a higher-priced mortgage loan secured by first lien without establishing
an escrow account for property taxes
and premiums for mortgage-related insurance
required by the mortgage lender.
Mortgage-related insurance includes
insurance against loss of or damage to
the property securing the loan, against
liability arising out of the ownership or
use of the property, or protecting the
mortgage lender against the consumer’s
default or other credit loss.23 A mortgage
lender is permitted to offer the borrower
an opportunity to cancel the escrow
account, but such cancellation can occur
only in response to a written request
from the consumer received by the mortgage
lender no earlier than one year after
consummation.24

Higher–Priced Mortgages and HMDA

Compliance practitioners should note the Home Mortgage Disclosure Act (HMDA) and Regulation C implications of Regulation Z‚s higher-priced mortgage amendments. Pursuant to the amendments to Regulation Z, the Federal Reserve has amended Regulation C, implementing HMDA. The amendments to Regulation C revise the rules for reporting price information on higher-priced mortgage loans. Regulation C currently requires mortgage lenders to collect and report the spread between the APR on a mortgage loan and the yield on a Treasury security of comparable maturity if the spread is greater than 3.0 percentage points for a first-lien loan or greater than 5.0 percentage points for a subordinate-lien loan. This difference is known as the rate spread. Under the revised rule, a mortgage lender will report the spread between the loan‚s APR and a survey-based estimate of APRs currently offered on prime mortgages of a comparable type (average prime offer rate) if the spread is equal to or greater than 1.5 percentage points for a first-lien loan or equal to or greater than 3.5 percentage points for a subordinate-lien loan.25

The changes are intended to improve the accuracy and usefulness of data reported under HMDA and conform the threshold for rate-spread reporting to the definition of higher-priced mortgage loans adopted under the Regulation Z amendments discussed above. By adopting this rate-spread–reporting threshold, the Federal Reserve expressed its intent to cover subprime mortgages and generally avoid covering prime mortgages. The Federal Reserve believes applying the new, market survey-based benchmarks in place of Treasury security yields will better achieve this purpose and ensure more consistent and more useful data. In addition, by implementing the same pricing threshold test under both regulations, the Federal Reserve aims to reduce the overall regulatory burden on mortgage lenders.

Regulation C‚s (HMDA) amended higher-priced mortgage loan reporting requirements take effect October 1, 2009. Thus, any subsequent HMDA analysis of higher-priced mortgage lending using 2009 loan data will be bifurcated between the loan data collected for the January through September period (using the former thresholds of APRs of 3.0 percentage points or 5.0 percentage points over Treasury yields) and the loan data collected for the October through December period (using the new benchmark of 1.5 percent points or 3.5 percent points over the average prime offer rate). Any year-over-year aberration noted in an institution‚s higher-priced mortgage lending involving 2009 loan data must be analyzed in the context of this bifurcation of collection thresholds.

Enhanced Protections for
Consumers of High-Cost
Mortgage Loans

Although higher-priced mortgage
loans represent a new category of loans
covered by Regulation Z, high-cost mortgage
loans do not. A high-cost mortgage
is any closed-end, home-equity mortgage
(either in a first or a subordinate position),
extended for a consumer (i.e.,
personal, family, or household) purpose,
secured by a consumer’s principal dwelling
with either (1) an APR at consummation
greater than 8.0 percentage points
for first-lien loans or 10.0 percentage
points for subordinate-lien loans above the
yield on Treasury securities with comparable
maturities, or (2) points and fees
payable by the consumer at or before loan.
closing exceeding the greater of 8 percent
of the total loan amount or $583.26

Because these mortgage loans are
secured by “the roof under which one
sleeps,” consumers taking out high-cost
mortgage loans have long been afforded
special protections under Regulation
Z.27 In addition to receiving information (i.e., disclosures) specific to the high-cost
mortgage loan (information beyond
that which is provided to consumers
in connection with a non-high-cost
mortgage loan), homeowners obtaining
high-cost mortgage loans receive
several substantive protections as well.28 However, pursuant to the same laws
under which consumer protections for
higher-priced mortgage loans have been
promulgated, enhancements to some of
the long-established consumer protections
for high-cost mortgage loans also
have been promulgated. To a significant
degree, these enhancements parallel and
conform to Regulation Z’s higher-priced
mortgage loan protections and relate to
collateral-based lending without regard
to repayment ability and prepayment
penalties.

Collateral-based Lending without
Regard to Repayment Ability

As with higher-priced mortgage lending,
mortgage lenders extending high-cost
mortgage loans are prohibited from
extending such loans based on the collateral
securing the loan without regard to the homeowner’s ability to repay the
loan. This is not a new prohibition under
the high-cost mortgage loan provisions of
Regulation Z. However, under the previous
regulation, such practice was a violation
of Regulation Z only when a “pattern
or practice” of such behavior was
demonstrated. Under amended Regulation
Z, there is no longer a requirement
to demonstrate a pattern or practice of
engaging in this form of underwriting to
establish a violation.

In addition, the previous regulation
created a mere presumption of violation
if a mortgage lender engaged in a pattern
or practice of making high-cost mortgage
loans without verifying and documenting
a consumer’s repayment ability. Under
amended Regulation Z, this presumption
has been eliminated. Instead, the
new high-cost mortgage loan provisions
(and the higher-priced mortgage loan
provisions) specifically prohibit relying
on a consumer’s income or assets
without verifying such amounts through
reasonably reliable third-party documentation,
such as W-2s, tax returns, payroll
receipts, or financial institution records.29

Prepayment Penalties

Other changes to Regulation Z’s high-cost
mortgage loan provisions pertain
to prepayment penalties and provide
enhanced consumer protections. Prepayment
penalties may be imposed on high-cost
mortgage loans only if such penalties
are permitted by other applicable law (e.g., state consumer protection laws)
and, per the Regulation Z amendments,
only if imposed within the first two years
of the loans.

High-cost mortgage loans share most of
the prepayment penalty prohibitions for
higher-priced mortgage loans.30 As with
higher-priced mortgage loans, prepayment
penalties on high-cost mortgage
loans may not be imposed:

At any time during the term of the
loan if other applicable law (e.g.,
state law) prohibits such penalty. This
represents no change from previous
high-cost mortgage loan prohibitions.

After the first two years of the loan
term. This is a change from the
previous regulation and enhances
consumer protection by reducing the
period after consummation from five
to two years, after which no prepayment
penalty may be imposed.

At any time during the term of the
loan if the consumer’s mortgage
payment (i.e., payment of principal or
interest or both) can change during
the first four years of the loan term.
This is a completely new provision
added to the prepayment penalty
prohibitions for high-cost mortgage
loans.31

At any time during the term of the
loan if the source of the prepayment
funds is a refinancing by the same
mortgage lender or an affiliate of the mortgage lender. This represents no
change from previous high-cost mortgage
loan prohibitions.

However, unlike higher-priced mortgage
loans, prepayment penalties on high-cost
mortgage loans may not be imposed
when, at consummation, the consumer’s
total monthly debt payments, including
amounts owed under the mortgage,
exceed 50 percent of the consumer’s
monthly gross income. This represents
no change from previous high-cost mortgage
loan prohibitions. This particular prepayment penalty restriction for
high-cost mortgage loans under section
226.32 was the only restriction not incorporated
into the prepayment penalty
provisions for higher-priced mortgage
loans under section 226.35.

To summarize key features and prohibitions
of higher-priced and high-cost mortgages
originated on or after October 1,
2009, and high-cost mortgages originated
prior to October 1, 2009, a side-by-side
comparison of these categories of mortgages
appears below.

Comparison of Higher-Priced and High-Cost Mortgages

Higher-Priced Mortgage Loans (Purchase-Money, Refinancings, and Home Equity Loans)
[10/1/09 and later originations]

High-Cost Mortgage Loans (Refinancings and Home Equity Loans Only)
[10/1/09 and later originations]

Thresholds based on average prime offer rate: APR must exceed the average prime offer rate by at least 1.5 percentage points for first-lien loans and 3.5 percentage points for subordinate-lien loans.

Thresholds based on either Treasuries or fees:
An APR greater than 8.0 percentage points for first-lien loans or 10.0 percentage points for subordinate-lien loans above the yield on Treasury securities with comparable maturities

– OR –

Points and fees exceeding the greater of 8 percent of the total loan amount or $583.

<Same

Prohibition

May not rely on the collateral securing the loan without regard to the consumer‚s ability to repay.

<Same

May not engage in a pattern or practice of asset-based lending.

Prohibition

May not rely on the consumer’s income or assets without verifying such amounts through reasonably reliable third-party documents.

<Same

May not fail to use documented, independent sources when considering the consumer’s repayment ability.

Prohibition

May not impose a prepayment penalty after two years.

<Same

May not impose a prepayment penalty after five years.

Prohibition

May not impose a prepayment penalty at any time if

other applicable law prohibits such penalty;

the consumer’s mortgage payment can change during the first four years of the loan term; or

the source of the prepayment funds is a refinancing by the same mortgage lender or an affiliate.

None>

May not impose a prepayment penalty at any time if

<Same

<Same

<Same

The consumer’s total monthly debt payments (at consummation), including amounts owed under the mortgage,exceed 50 percent of the consumer’s monthly gross income.

May not impose a prepayment penalty at any time if

<Same

<None

<Same

<Same

Prohibition

May not fail to escrow for property taxes and mortgage-related insurance when the mortgage loan is secured by a first lien

<None

<None

Prohibition

May not structure a home-secured loan as an open-end plan to evade Regulation Z’s higher-priced mortgage provisions.

May not structure a home-secured loan as an open-end plan to evade Regulation Z’s high-cost mortgage provisions

<Same

Prohibition

None>

May not

impose, with limited exception, a balloon payment on loans with a term of less than five years;

impose negative amortization;

collect advance payments, i.e., the consolidation and collection of more than two periodic payments, paid in advance from the loan proceeds;

increase an interest rate upon default;

include, with limited exception, a due-on-demand clause;

unfairly calculate interest due to be rebated to a consumer in connection with loan acceleration resulting from default;

make, with limited exception, a direct payment of loan proceeds to a home improvement contractor, payable solely in the name of the contractor;

fail to furnish the required Regulation Z notice to an assignee of a high-cost mortgage (informs the assignee this mortgage is subject to special TILA protections and the assignee could be liable for claims and defenses the consumer could assert against the lender);

refinance a high-cost mortgage made by the same lender into another high-cost mortgage to the same homeowner within one year of consummation unless the refinancing is in the homeowner’s interest, e.g., a lower interest rate.

Responsible creative financing, which
often can help many borrowers obtain
a prudent, affordable loan, sometimes
gives way to irresponsible, costly, and
(in certain cases) unsustainable and
abusive financing. While Regulation Z
has long provided protections against
certain abusive mortgage lending
practices, these protections applied
primarily to a limited class of high-cost
home equity mortgage loans (i.e.,
mortgage loans taken out by consumers
who already owned their homes).
Such protections did not extend to
consumers first purchasing their homes
(i.e., purchase-money home mortgage
loans). Compounding the situation, home
purchasers most vulnerable to these
aggressive mortgage terms and lending
practices are those who, by virtue of the
fact they are often first-time or unsophisticated
homebuyers, are least able
to protect themselves against the onerous
terms or practices often associated
with these products.

To address and mitigate the risks
associated with many of these mortgage
loans and lending practices, whether
relating to home purchase or refinancing,
the FDIC and other bank regulators
issued guidance to their respective
supervised institutions advising them of
supervisory expectations with respect to
the origination of these mortgage products
(often referred to as nontraditional
or subprime home mortgage loans),
including expectations with respect to
consumer protection.32 The Nontraditional
Mortgage (NTM) and Subprime
Mortgage Guidance documents reflect
the FDIC’s position on appropriate lending
behavior with respect to mortgage
loans subject to this guidance.

Many of the mortgage loan characteristics,
and the risks they present,
discussed in these guidance documents
are the subject of the recent amendments
to Regulation Z. Thus, with the
promulgation of these Regulation Z
amendments, much of the previously
issued guidance relating to managing
heightened risk levels has been
superseded by Regulation Z’s outright
prohibitions against certain mortgage
lending practices. What was guidance
in the form of admonishment has
essentially become law. As discussed
in this article, many of the risk-layering
practices of concern addressed in those
documents—such as relying on reduced
or no documentation, failing to verify
a borrower’s repayment ability, and
the imposition of prepayment penalties
without limit—are now prohibited by
Regulation Z where the terms of a mortgage
loan constitute a higher-priced or
high-cost mortgage. As such, a comprehensive
review for predatory or abusive
mortgage lending practices should
reference the amendments to Regulation
Z along with the NTM and Subprime
Mortgage Guidance documents. And,
of course, any practices of concern not
specifically addressed by Regulation
Z or other consumer protections laws
should be scrutinized under the unfair
or deceptive prongs of section 5 of the
Federal Trade Commission Act.

Appraisal and Servicing
Protections for Consumers of
Mortgage Loans Secured by
the Consumer’s Principal
Dwelling

To prevent practices that the Federal
Reserve describes as “unfair, deceptive,
associated with abusive lending practices,
or otherwise not in the interest of
the borrower,”33 Regulation Z has been
amended to extend new protections to
consumers of all mortgage loans (i.e.,
not limited to higher-priced or high-cost
mortgage loans) secured by the
consumer’s principal dwelling, extended
for a consumer (i.e., personal, family, or
household) purpose. These protections
are intended to ensure the accuracy and
integrity of appraisals and the fair treatment
of borrowers by servicers. The
Federal Reserve believes these protections
will also enhance a consumer’s
informed use of credit.

The amended regulation prohibits mortgage
lenders and mortgage brokers from
coercing, influencing, or encouraging
an appraiser to misrepresent the value
of the property. The rule also prohibits
creditors from extending credit when a
creditor knows that a person has coerced,
influenced, or encouraged an appraiser,
unless the creditor acts with reasonable
diligence to determine that the appraisal
does not materially misstate or misrepresent
the value of the property.34 Given
the prevalence of these types of unfair
appraisal practices among brokered
mortgages loans, FDIC-supervised institutions
should pay particular attention to
and closely monitor for the existence of
such practices when originating mortgage
loans through third parties.35

In addition, under the amendments to
Regulation Z, servicers are prohibited
from (1) failing to credit a payment to
the consumer’s account as of the date of
its receipt,36 (2) “pyramiding” late fees
(i.e., levying or collecting a delinquency
charge on a payment, when the only
delinquency is attributable to late fees or
delinquency charges assessed on earlier
installments),37 and (3) failing to provide
a payoff statement within a reasonable
amount of time after receiving a request
from the consumer.38

Expanded and Enhanced
Early Disclosure Requirements
and New Prohibitions against
Deceptive Advertising

Regulation Z also has been amended
to provide new and enhanced protections
to consumers of all home mortgage
loans secured by “any” dwelling (i.e.,
not limited to a consumer’s principal
dwelling), extended for a consumer (i.e.,
personal, family, or household) purpose.
These protections relate to Regulation Z’s
early disclosure requirements and prohibited
advertising practices.

Early Disclosures

The amendments to Regulation Z
extend the early disclosure requirements
of section 226.19 in several important
ways. First, the amendments extend these requirements, previously applicable
only to purchase-money transactions,
to refinancings and home equity loans.
Second, the amendments extend the
early disclosure requirements, previously
applicable only to mortgage loans
secured by a consumer’s principal dwelling,
to mortgage loans secured by any
consumer dwelling. Third, the amendments
require delivery or mailing of
the early disclosures to occur at least
seven business days before consummation.
Fourth, if the annual percentage
rate provided in the early disclosures
changes (beyond the tolerances provided
in section 226.2239), the amendments
require redisclosure at least three business
days before consummation.40 Fifth,
except to the extent that such a fee is for
the purpose of obtaining a credit report,
the amendments prohibit charging an
application fee until after a consumer has
received the early disclosures.

Compliance Practitioner Note:

The amendments to Regulation Z pertaining to early disclosures under Section 226.19, “Certain residential mortgage and variable-rate transactions,” have occurred over the course of ten months and two separate rulemakings, the first in the summer of 2008 and the second in the spring of 2009. The 2008 amendments had an effective date of October 1, 2009, and therefore did not take effect before the superseding 2009 amendments. The 2009 amendments, prompted by Congress under the Mortgage Disclosure Improvement Act, take effect on July 30, 2009. Thus, all written applications received by mortgage lenders on or after July 30, 2009, must comply with the early disclosure requirements of Regulation Z as amended in 2009 and as described in this article.

A side-by-side comparison of the differences
between the 2008 early disclosures
amendments to Regulation Z (i.e., those
that were to take effect October 1, 2009,
but now will not) and the superseding
2009 early disclosure amendments (i.e.,
those that will take effect starting July
30, 2009) appears below.

Within three business days of application and at least seven business days before consummation (Timing waiver for bona fide emergency)

Content:

Good faith estimate of 226.18 disclosures

Good faith estimate of 226.18 disclosures and the statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.”

Timing of re-disclosure (if APR outside 226.22 tolerance):

Must be given no later than consummation or settlement

Must be given at least three business days before consummation

Application fee:

No application fee allowed until after early disclosures provided, except for a credit report fee

Same

Advertising

In general, Regulation Z requires advertisements
for mortgages (obtained for a
personal, family, or household purpose,
secured by a consumer’s dwelling) to
provide accurate and balanced information,
in a clear and conspicuous manner,
about rates, monthly payments, and
other loan features. It prohibits advertisements
that fail to do this.

Regulation Z, as amended, delineates
several mortgage advertising practices
and, effective October 1, 2009, specifically
prohibits them as deceptive or
misleading. The following two tables (one
applicable to closed-end mortgages and
the other to home-equity plans) set forth
the practices and prohibitions addressed
by the advertising provisions of amended
Regulation Z.

Advertisements that state “fixed” rates or payments for loans whose rates or payments can vary without adequately disclosing that the interest rate or payment amounts are “fixed” only for a limited period of time, rather than for the full term of the loan.

Advertising an example of a rate or payment and comparing it to the consumer’s rate or payment.

Advertisements that compare an actual or hypothetical rate or payment obligation to the rates or payments that would apply if the consumer obtains the advertised product unless the advertisement states the rates or payments that will apply over the full term of the loan.

Advertising a “government” association with the loan product.

Advertisements that characterize the products offered as “government-supported loans,” or otherwise endorsed or sponsored by a federal or state government entity when, in fact, the advertised products are not government-supported or government-sponsored loans.

Advertising that includes the name of the consumer’s current mortgage lender.

Advertisements, such as solicitation letters, that display the name of the consumer’s current mortgage lender, unless the advertisement also prominently discloses that the advertisement is from a mortgage lender not affiliated with the consumer’s current lender.

Advertising that makes claim of debt elimination.

Advertisements that make claims of debt elimination if the product advertised would merely replace one debt obligation with another.

Advertising that suggests the establishment of a “counselor” relationship.

Advertisements that create a false impression that the mortgage broker or lender is a “counselor” for the consumer.

Advertising selective attributes of a loan product in a foreign language.

Foreign–language advertisements in which certain information, such as a low introductory “teaser” rate, is provided in a foreign language, while required disclosures are provided only in English.

An ARM advertisement that states an initial APR that is not based on the index and margin used to make later rate adjustments that does not also state, with equal prominence and in close proximity to the initial rate:

The period of time such initial rate will be in effect; and

A reasonably current annual percentage rate that would have been in effect using the index and margin.

Advertising a loan’s minimum required payment.

An advertisement that contains a statement of a loan’s minimum periodic payment if, by making only the minimum payment, a balloon payment may result, unless:

The advertisement also states, with equal prominence and in close proximity to the minimum periodic payment statement that a balloon payment may result.

Advertising the tax deductibility of interest expense.

An advertisement that suggests that any interest expense incurred under the home-equity plan is or may be tax deductible when it is not.

If an advertisement distributed in paper form or through the Internet (rather than by radio or television) is for a home-equity plan secured by the consumer’s principal dwelling, and the advertisement states that the advertised extension of credit may exceed the fair market value of the dwelling, the advertisement shall clearly and conspicuously state that:

The interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for federal income tax purposes; and

The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges.

Advertising of promotional rate or promotional payment.

If any APR that may be applied to a plan is a promotional rate,43 or if any payment applicable to a plan is a promotional payment,44 advertisements (other than television or radio advertisements) that fail to disclose the following information, in a clear and conspicuous manner with equal prominence and in close proximity to each listing of the promotional rate or payment:

The period of time during which the promotional rate or promotional payment will apply.45

In the case of a promotional rate, any annual percentage rate that will apply under the plan. (If such rate is variable, the APR must be disclosed in accordance with Regulation Z’s accuracy standards in §§226.5b, or 226.16(b)(1)(ii) as applicable).

In the case of a promotional payment, the amounts and time periods of any payments that will apply under the plan. In ARM transactions, payments that will be determined based on application of an index and margin shall be disclosed based on a reasonably current index and margin.

Envelope / Electronic Advertisements Excluded
The requirement to state the promotional period and post-promotional rate or payments does not apply to an advertisement on an envelope in which an application or solicitation is mailed, or to a banner advertisement or pop-up advertisement linked to an application or solicitation provided electronically.Alternative Disclosures for Television or Radio Ads
An advertisement for a home-equity plan made through television or radio stating any of the terms requiring additional disclosures may alternatively comply by stating the information required by these advertising provisions and listing a toll-free telephone number, or any telephone number that allows a consumer to reverse the phone charges when calling for information, along with a reference that such number may be used by consumers to obtain additional cost information.

Effective Dates

Regulation Z’s early disclosure provisions
(now applicable to non-purchase-money
mortgage transactions and to
mortgage transactions secured by any
consumer dwelling) become effective on
July 30, 2009. The effective date for the
early disclosure provisions was initially
October 1, 2009. However, the Federal
Reserve, pursuant to the Mortgage
Disclosure Improvement Act of 2008,
subsequently moved up the effective date
to July 30, 2009.

Regulation Z's escrow provisions for
higher-priced mortgage transactions
become effective on April 1, 2010. Given
the limited industry infrastructure for
escrowing for mortgage loans secured
by manufactured housing, the effective
date for compliance with Regulation
Z’s escrow provisions for higher-priced
mortgage loans secured by manufactured
housing is October 1, 2010.

All other provisions of the Regulation
Z amendments take effect on October 1,
2009.

Conclusion

In promulgating its final rule implementing
these amendments to Regulation
Z, the Federal Reserve noted that
nothing in this rule should be construed
or interpreted to be a determination that
acts or practices restricted or prohibited
under this rule are, or are not, unfair
or deceptive before the effective dates
of the rule’s provisions. Accordingly,
questionable mortgage lending practices,
such as the ones addressed by this rule
and discussed in this article, engaged
in by FDIC-supervised institutions will
continue to be scrutinized by the FDIC
on a case-by-case basis under all applicable
consumer protection laws, including
section 5 of the FTC Act, through its
examination-consultation process and, if
warranted, through agency enforcement
actions. For this reason, FDIC-supervised
institutions should regularly monitor and
update their compliance management
programs and remain vigilant against
engaging in unfair or deceptive mortgage
lending practices that violate Regulation
Z or any other consumer protection law
or regulation.46

4 While home ownership has been expanded through use of alternative financing products, such as “nontraditional” (i.e., interest–only and payment–option) and “subprime” (i.e., hybrid adjustable-rate mortgages [ARMS], ARMs with an initial fixed-rate period that later adjusts, often significantly) mortgage loans, such alternative loan products often contain terms and features that result in unsustainable home ownership and other harm to consumers. The offering of such alternative mortgage loan products by institutions should present red flags to FDIC examiners and others concerned with compliance with these latest amendments to Regulation Z. For further discussion relating to FDIC guidance on nontraditional mortgage loans and subprime mortgage lending, see “Impact of Regulation Z’s Higher-Priced and High-Cost Mortgage Amendments on Nontraditional and Subprime Mortgage Guidance” below, at page 36.

5 These higher-priced mortgage loan protections are similar to and complement those protections already established for high-cost mortgages under sections 32 and 34 of CFR Part 226, discussed below.

6 The average prime offer rate used to establish a higher-priced mortgage loan is an annual percentage rate (APR) derived from average interest rates, points, and other loan pricing terms offered to consumers by a representative sample of creditors for mortgage transactions with low-risk pricing characteristics. To determine current average prime offer rates go to http://www.ffiec.gov/rate-spread/newcalc.aspx. Higher-priced mortgage loans do not include mortgage loans to finance the initial construction of a dwelling, a temporary or bridge loan with a term of 12 months or less, a reverse mortgage, or a home equity line of credit. See section 226.35(a)(3). Note: Home Mortgage Disclosure Act (HMDA) Regulation C requires the reporting of rate spreads for higher-priced mortgage loans. However, currently under Regulation C, mortgage lenders collect and report the spread between the APR on a mortgage loan and the yield on a Treasury security of comparable maturity if the spread is greater than 3.0 percentage points for a first-lien loan or greater than 5.0 percentage points for a subordinate-lien loan. Under the revised HMDA rule, a mortgage lender will report the rate spread for higher-priced mortgage loans in conformance with these amendments to Regulation Z; that is, a mortgage lender will report the spread between a loan’s APR and the survey-based estimate of APRs currently offered on prime mortgages of a comparable type (average prime offer rate) if the spread is equal to or greater than 1.5 percentage points for a first-lien loan or equal to or greater than 3.5 percentage points for a subordinate-lien loan. For further discussion on the implications of the Regulation Z amendments for HMDA reporting, see “Higher-Priced Mortgages and HMDA,” below, at page 32.

7 In addition to these practices, Regulation Z also prohibits as unfair the practice of structuring a home-secured loan as an open-end plan to evade the higher-priced mortgage provisions of Regulation Z. See section 226.35(b)(4).

8 As previously noted by the FDIC and the other federal banking agencies, predatory lending practices often involve inducing a borrower to refinance a loan repeatedly to charge high points and fees each time the loan is refinanced (loan flipping). See FIL-9-2001 (http://www.fdic.gov/news/news/financial/2001/fil0109.html). The rule’s prohibition against originating a higher-priced mortgage loan based on the value of the collateral securing that loan without regard to the consumer’s ability to repay the loan is equally applicable to high-cost mortgages under sections 226.32 and 226.34.

9 For instance, a medical resident’s income can be expected to significantly increase on completion of his or her residency, and a mortgage lender may consider this information in determining repayment ability. However, if an applicant states an intention to retire within 12 months of consummation of the loan with no plans to obtain new employment, the mortgage lender also must consider this reduction in income in determining repayment ability.

10 Compliance practitioners should note that the Regulation Z amendments supersede previously issued Nontraditional Mortgage (NTM) Guidance relative to higher-priced mortgages that allowed stated income documentation. The superseded provision of the NTM Guidance provides, “Reduced Documentation—Institutions increasingly rely on reduced documentation, particularly unverified income, to qualify borrowers for nontraditional mortgage loans. Because these practices essentially substitute assumptions and unverified information for analysis of a borrower’s repayment capacity and general creditworthiness, they should be used with caution. As the level of credit risk increases, the Agencies expect an institution to more diligently verify and document a borrower’s income and debt reduction capacity. Clear policies should govern the use of reduced documentation. For example, stated income should be accepted only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity. For many borrowers, institutions generally should be able to readily document income using recent W-2 statements, pay stubs, or tax returns” http://www.fdic.gov/news/news/financial/2006/fil06089.html. Compliance practitioners should also note that Regulation Z’s prohibition against relying on the consumer’s income, assets, or obligations without verifying such amounts through reasonably reliable third-party documentation is equally applicable to high-cost mortgages under sections 226.32 and 226.34.

11 Higher-priced mortgage lenders (as well as high-cost mortgage lenders, discussed below) may not rely on information provided orally by third parties, but may rely on various forms of correspondence from third parties, such as letters or e-mails. See Supplement I to section 226.34(a)(4)(ii)(A)(3).

12 Where a consumer lists an obligation not reflected in a credit report, a higher-priced mortgage lender (as well as a high-cost mortgage lender, discussed below) must consider such obligation in determining a consumer’s ability to repay the higher-priced mortgage, but it is not required to verify the obligation. See Supplement I to section 226.34(a)(4)(ii)(C)(1).

13 No presumption of compliance is available for higher-priced mortgage loans where the loan provides for negative amortization (a feature prohibited for high-cost mortgages, discussed below) or where a balloon payment can occur within seven years of consummation. See section 226.34(a)(4)(iv).

14 Verification of a consumer’s ability to repay is a requirement under Regulation Z regardless of the presumption of compliance; in other words, forgoing this available presumption of compliance does not relieve a mortgage lender from its regulatory obligation to verify a consumer’s repayment ability.

15 For examples of how to determine the maximum scheduled payment in the first seven years under several mortgage product types, see Supplement I to section 226.34(a)(4)(iii)(B)(1), applicable to higher-priced mortgage loans (and to high-cost mortgage loans, discussed below).

16 Although the regulation does not set forth specific numerical standards for establishing repayment ability, it does note that the presumption of compliance with the prohibition against extending higher-priced mortgages without regard to repayment ability is rebuttable by a consumer showing that a mortgage lender that otherwise followed the regulation’s delineated underwriting procedures disregarded the consumer’s ability to repay the loan. As an example, the regulation states that evidence of a very high debt-to-income ratio or very limited residual income could be sufficient to rebut the presumption of compliance. However, the regulation clarifies that merely failing to follow one of the nonrequired underwriting procedures (#2 or #3) does not result in a presumption of violation of Regulation Z; rather, determination of a mortgage lender’s compliance with the regulation in such cases must turn on the individual facts and circumstances.

18 For example, see FDIC’s Supervisory Policy Statement on Predatory Lending, http://www.fdic.gov/news/news/financial/2007/fil07006a.html. “Predatory lending involves ... making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation.” In its comment letter to the Federal Reserve on the 2008 Regulation Z amendments, the FDIC expressed its belief that the Federal Reserve should eliminate the safe harbor and stand firm in requiring lenders to adequately verify borrowers’ income and assets. Specifically, the FDIC wrote, “Verifying a borrower’s income and assets is a fundamental principle of sound mortgage loan underwriting that protects borrowers, neighborhoods, investors, and the financial system as a whole.... Requiring borrowers to document their income will make it far less likely that consumers will receive loans that they cannot afford to pay. Documentation also will provide the markets with greater confidence in the quality of pools of higher-priced (and nontraditional) mortgage loans and their projected income streams. Thus, both consumers and the economy as a whole will benefit.” See http://www.federalreserve.gov/SECRS/2008/April/20080409/R-1305/R-1305_1075_1.pdf.

19 These prepayment penalty prohibitions are equally applicable to “high-cost mortgages” under sections 226.32 and 226.34. Note: Under Regulation Z, 12 CFR 226.23(a)(3), footnote 48, a high-cost mortgage loan having a prepayment penalty that does not conform to the requirements of section 226.32(d)(7) is subject to a three-year right of the consumer to rescind. The FRB is revising footnote 48 to clarify that a higher-priced mortgage loan (whether or not it is a HOEPA loan) having a prepayment penalty that does not conform to the requirements of section 226.35(b)(2) also is subject to a three-year right of rescission.

20 FDIC-supervised institutions may not impose prepayment penalties on any consumer mortgage, even if it is not higher-priced or high-cost under Regulation Z, if other applicable law prohibits such penalties.

21 For examples demonstrating whether prepayment penalties are permitted or prohibited based on changes in mortgage payments due to negative amortization, see Supplement I to Part 226 under 226.35(b) (2) i-ii, applicable to both higher-price and high-cost mortgages. Exception: Negative amortization is prohibited for high-cost mortgage loans under section 226.32. Thus, the negative amortization examples contained in the rule are applicable only to higher-priced mortgage loans under section 226.35(b). For other examples demonstrating whether prepayment penalties are permitted or prohibited based on changes in mortgage payments during the first four years of a mortgage, see Supplement I to Part 226 under 226.32(d)(7)(iv). These examples also are applicable to higher-priced mortgages under 226.35 and high-cost mortgages under 226.32. Exception: The example relating to debt-to-income ratio is not applicable to higher-priced mortgages.

22 As previously noted by the FDIC and the other federal banking agencies, predatory lending practices often involve inducing a borrower to refinance a loan repeatedly to charge high points and fees each time the loan is refinanced (loan flipping). See FIL-9-2001, http://www.fdic.gov/news/news/financial/2001/fil0109.html.

23 Regulation Z provides two exemptions from this general prohibition. A mortgage lender is not required to (1) establish an escrow account for mortgage loans secured by a cooperative, or (2) escrow for mortgage-related insurance premiums for mortgage loans secured by a condominium where the condominium association has an obligation to the condominium unit owners to maintain a master policy insuring condominium units.

24 Unlike the other amendments to Regulation Z discussed in this article that have an October 1, 2009, effective date, the provisions relating to escrowing for higher-priced mortgage loans have a delayed effective date of April 1, 2010. Thus, all mortgage loans for which written applications were received by April 1, 2010, must comply with Regulation Z’s escrow provisions for higher-priced mortgage loans.

25 The Federal Reserve intends to publish average prime offer rates based on the Primary Mortgage Market Survey® currently published by Freddie Mac. To determine current average prime offer rates go to http://www.ffiec.gov/rate-spread/newcalc.aspx.

26 The $583 figure is as of 2009. This amount is adjusted annually by the Federal Reserve based on changes in the Consumer Price Index.

27 Unlike higher-priced mortgage loans under section 226.35 of Regulation Z (which include both purchase-money and non-purchase-money mortgage loans secured by a consumer’s principal dwelling), section 32 high-cost mortgage loans are limited to non-purchase-money home loans (i.e., mortgage loans on homes already owned, such as refinancings or home equity loans) secured by a consumer’s principal dwelling. As with higher-priced mortgage loans, high-cost mortgage loans exclude home equity lines of credit and reverse mortgages.

28 Sections 32 and 34 of Regulation Z prohibit a high-cost mortgage lender from (1) imposing, with limited exception, a balloon payment in connection with a high-cost mortgage loan with a term of less than five years; (2) imposing negative amortization; (3) collecting advance payments, i.e., the consolidation and collection of more than two periodic payments, paid in advance from the loan proceeds; (4) increasing an interest rate upon default; (5) including, with limited exception, a due-on-demand clause; (6) unfairly calculating interest to be rebated to a consumer in connection with loan acceleration resulting from default; (7) making, with limited exception, a direct payment of loan proceeds to a home improvement contractor, payable solely in the name of the home improvement contractor; (8) failing to furnish the required Regulation Z notice to an assignee of a high-cost mortgage loan (such notice informs the assignee that this is a mortgage subject to special protections under TILA and that the assignee could be liable for claims and defenses that the consumer could assert against the lender); (9) refinancing a high-cost mortgage loan that was made by the same mortgage lender into another high-cost mortgage loan to the same homeowner within one year of consummation, unless the refinancing is in the homeowner’s interest (e.g., a lower interest rate); (10) extending a high-cost mortgage loan based on the value of the collateral securing the loan without regard to the homeowner’s repayment ability; and (11) imposing prepayment penalties in certain circumstances. In addition to these practices, Regulation Z also prohibits as unfair the practice of structuring a home-secured loan as an open-end plan to evade the high-cost and higher-priced mortgage provisions of Regulation Z.

29 With respect to a consumer’s obligations, a mortgage lender may verify such obligations via a credit report. With respect to obligations listed on an application but not appearing on a credit report, the mortgage lender has no further duty regarding such obligation other than to consider it in determining a consumer’s repayment ability. For further information, see discussion on ability to repay and income/asset/obligation verification under higher-priced
mortgage loans above.

30 Some of the prepayment penalty prohibitions for high-cost mortgage loans represent changes from the previous regulation, while others do not.

31 For examples demonstrating whether prepayment penalties are permitted or prohibited based on changes in mortgage payments during the first four years of a mortgage, see Supplement I to Part 226 under 226.32(d)(7)(iv). These examples are applicable to both higher-priced mortgages under 226.35, except for the example relating to debt-to-income ratio, which is not applicable to higher-priced mortgages, and high-cost mortgages under 226.32. Note: Negative amortization is prohibited for high-cost mortgage loans under section 226.32. Thus, the negative amortization examples provided are applicable only to higher-priced mortgage loans under section 226.35(b).

34 Though Regulation Z limits the coverage of this prohibition to mortgage loans secured by a consumer’s principal dwelling, the FDIC will examine and potentially cite such practices relative to all mortgage loans pursuant to section 5 the FTC Act, under the standards for unfair or deceptive active acts or practices. Furthermore, the FDIC has promulgated regulations and guidance that set forth standards for the policies and procedures FDIC-supervised institutions are expected to implement to ensure the independent judgment of appraisers when valuing property. See Appraisals at 12 CFR 323, http://www.fdic.gov/regulations/laws/rules/2000-4300.html, and Real Estate Lending Standards at 12 CFR 365, http://www.fdic.gov/regulations/laws/rules/2000-8700.html.

35 Bill Garber, director of government affairs for The Appraisal Institute (Institute), notes that “there are a number of pressure points for appraisers, and that pressure can come from any number of parties in a given transaction (mortgage broker, loan officer, realty agent, etc.).” Garber goes on to say that, according to the Institute‚s members, “the most pervasive pressure comes from mortgage brokers or other parties that are ‘volume‚ driven.” See http://realtytimes.com/rtpages/20050208_appraisers.htm.

36 Section 226.36(c) provides limited exceptions to this prohibition, such as where the delay does not result in a charge to the consumer or negative reporting to a consumer reporting agency, or, where the consumer fails to follow the lender‚s written instructions for making payment, the servicer credits a payment received under such circumstances within five days of receipt.

37 Note: Regulation AA, implementing section 5 of the FTC Act (UDAP) also prohibits the pyramiding of late fees in credit transactions, including transactions secured by real estate (other than for the purchase of real estate which are not covered by Regulation AA). However, unlike Regulation Z, Regulation AA applies only to institutions supervised by the federal banking agencies. By adding this explicit prohibition to Regulation Z, the Federal Reserve has extended this prohibition to all mortgage lenders, not just banks, thrifts, and credit unions.

38 The Federal Reserve notes that while five days is reasonable, a longer period may be warranted under certain conditions.

39 Section 226.22 provides a tolerance of one-eighth of 1 percent for regular transactions and one-quarter of 1 percent for irregular transactions.

43 Promotional rate. The term “promotional rate” means, in a variable-rate plan, any annual percentage rate that is not based on the index and margin that will be used to make rate adjustments under the plan, if that rate is less than a reasonably current annual percentage rate that would be in effect under the index and margin that will be used to make rate adjustments under the plan.

For a variable-rate plan, any minimum payment applicable for a promotional period that is:

Not derived by applying the index and margin to the outstanding balance when such index
and margin will be used to determine other minimum payments under the plan; and

Less than other minimum payments under the plan derived by applying a reasonably current index and margin that will be used to determine the amount of such payments, given an assumed balance.

For a plan other than a variable-rate plan, any minimum payment applicable for a promotional period if that payment is less than other payments required under the plan given an assumed balance.

45 Promotional period. A “promotional period” means a period of time, less than the full term of the loan, that the promotional rate or promotional payment may be applicable.

46 The FDIC, in concert with other federal and state bank regulatory agencies, is in the process of promulgating interagency examination procedures pertaining to these amendments to Regulation Z and anticipates their issuance shortly.